Japan disaster’s effect on those retiring

Tuesday, 15th March 2011 10:45 - by Resident IFA

I was beavering away yesterday; preparing for an interim Client meeting – to let him know how my financial planning thoughts had progressed re: his impending retirement. He is not exposed to Japanese equities in the sense that he neither owns individual Japanese stocks, nor is invested in a fund within one of the three Japanese IMA (Investment Management Association) categories. This matters not one jot. The well-known phrase along the lines of ‘America sneezes and the world catches a cold’ could be amended to substitute Japan for America. So, having just taken him on as a Client and not immediately moved his pension funds into a cash environment, he will undoubtedly now face a decline in value as a proportion of his holdings are invested in equities. This drop is obvious from the fact that, as a result of Japan’s Nikkei share index having fallen by over 10% today as I write, the FTSE100 and FTSE All-Share indices are also down by 2.5% or thereabouts. My Client is relatively ‘lucky’, having a healthy ongoing income stream until August, and yet another decent income stream that might outlast that – providing him with the opportunity to wait before ‘crystallising’ his pension benefits. Others will not be so lucky... Imagine a 10% fall on your pension fund value the week before you retire. On a £100,000 fund, this would mean a £2,500 reduction in the available tax-free cash, and £7,500 less with which to provide income. Pretty galling, yet a mere blip in relation to the devastating events and aftermath we are seeing on our television screens. From a financial planning point of view, I am illustrating the very real need for a coherent plan in the years approaching retirement. If I had met this Client 5 years ago, I would have urged him (perhaps simplistically) to take a more cautious approach with 20% of his pension fund (i.e. take flight to cash or the like) each year. If this had been the case, he would only have either 0% or 20% in equities at this point...a far better position to be in in light of the Japanese catastrophe. It shows that, even though the markets have enjoyed two years of ‘bounce-back’, you cannot take anything whatsoever for granted. Until next time...